The present invention relates generally to methods and devices for electronically trading securities and more particularly to a method and device for electronically trading securities between brokers in which trade confirmation is performed automatically.
The torrid pace of evolution in the securities market continues to intensify. Many investors, such as pension fluids, are constantly seeking greater returns on their assets and are looking to emerging markets to meet this requirement. Consequently there is an ever increasing movement of funds into and out of international securities.
Concurrent with this explosion in cross-border trading, financial institutions are being confronted with shortening settlement cycles, increased competition in the global market place, and rapid advances in technology. To meet these challenges and improve profitability, financial institutions will need to re-engineer business processes to increase efficiency, automate to reduce costs and expedite settlement, and move towards proactive risk management.
One area in need of an improvement in efficiency is broker to broker trade confirmations. This is a business process for confirming and settling trade orders placed between brokers from various regions of the world. Today, institutional investors routinely make cross border trades in blocks in excess of 100,000 shares. In the near future, these numbers may double or even triple. Unfortunately, settlement failures for cross border trades has been estimated at as much as 30%. For the large block cross border trades, this failure rate is extremely costly. These costs may actually limit the sizes of cross border block trades in certain circumstances.
Language barriers, time differences and physical distance combined with short settlement periods increases the risks for all security trading participants. While the current suite of electronic trading products have reduced the risk for the investor and the executing broker by automating the confirmation process, none of the products has provided an efficient method for routing settlement instructions to agent banks. Banks are forced to rely on a variety of manual methods for receiving settlement instructions from their counterparties. These settlement instructions are often received by the bank after the trade is supposed to settle and often contain multiple errors. Banks are required to employ large staffs to chase down settlement instructions, repair messages and to manually match settlement instructions with executing brokers' instructions prior to settlement taking place.
An example of the way these types of transactions occur today is as follows. Company A, Hong Kong, places an order with Company B, Philippines to purchase 1,000 shares of Securities C. To place the order, the originating broker at Company A telephones and faxes to Company B. Upon receiving the order, an executing broker at Company B executes the trade at the Makati Stock Exchange on Company A's behalf. Typically at the end of the day, Company B notifies Company A, Hong Kong that the trade has been successfully executed. The notification is followed by a fax transmission to the brokers' custodian and clearing agent where the actual fund and security transfer will take place. The entire process could take somewhere between a day and up to several days.
As evident from the above example, this process flows though several stages and tends to be time consuming and error prone. This problem is particularly acute when trading across wide time zone gaps, leaving tight datelines for settling trades and correcting any errors. For institutional money managers, brokers and banks, carrying unconfirmed trades on their books increases risk. Thus, delays in achieving confirmation are costly to financial institutions reducing the profit margin on these transactions.
Systems exist that permit securities traders to communicate electronically with each other. Each of these systems require the investor's clearing agent to manually pre-match a settlement instruction with the executing broker. Currently, there are no products that can effectively automate the trading confirmation process between brokers.
The Depository Trust Company's ID system is used in the United States between institutional investors and broker dealers to confirm transactions for DTC eligible U.S. securities. This system does not operate on a central matching basis; institutions must wait for broker dealers to submit trade data for which they must provide an affirmation. For no DTC eligible securities, the institution must send a message to its clearing agent notifying them of a securities transaction. The institution's clearing agent must manually pre-match the settlement instruction with the executing broker instructions before the actual settlement can occur.
Thomson Financial's OASYS Global service also allows institutions and brokers to confirm transactions. OASYS Global, however, does not offer centralized matching and does not automatically generate settlement instructions and route them over the Society for Worldwide Interbank Financial Telecommunications (SWIFT) Financial Network. Additionally, OASYS Global Message formats are not based on the SWIFT standards.
The London Stock Exchange SEQUAL product offers a centralized broker to broker matching facility, however, SEQUAL does not generate settlement instructions to clearing agents and its message structures are not based on SWIFT formats. Security participants also communicate settlement instructions to their clearing agents via telexes, faxes, telephone calls and independently via the SWIFT network.
U.S. Pat. No. 5,497,317 discloses a method for improving security trade settlements. FIGS. 1 and 2 depict the device and method 10 disclosed by this patent, in which trade settlement information is communicated securely between institutional investors 12, brokers 14 and custodians 16. As defined in this patent, institutional investors consists of retirement and pension funds, mutual fund companies, investment advisors, insurance companies and other investors, which manage and trade for two or more accounts. Custodian is defined as a bank, security depository or other settlement agent. In this system, brokers 14 and custodians input delivery instructions 32 to delivery database 30 along respective lines 31, 33 (FIG. 2). Delivery instructions are stored in database 30 in a format compatible with both IUG and ISITC standards. Referring to FIG. 1, the diagonal lines 20, 21, 22 represent communication links between security trading participants and a central database 24 (which actually consists of two separate databases), and between the participants themselves for exchanging messages, e.g. electronic mail, not relating to settlement of a particular trade. The horizontal and vertical lines 18 between institutions and brokers represent communication links utilized immediately after trade execution to settle the trade. Similarly, the horizontal and vertical lines 19 between institutions and custodians represent security trade settlement communication links. Referring to FIG. 2, brokers 14 and custodians 16 input delivery instructions 32 to delivery database 30 along respective lines 31, 33. The device and method disclosed in this patent is for settling trades, not placing orders, and thus no communication links are provided prior to trade execution. Referring again briefly to FIG. 1, after exchange of settlement information with brokers 14, institutions 12 use communication link 19 to inform custodians 16 of the trade and provide them with the trading brokers' delivery instructions for settlement. After affirming the brokers' confirmations for each allocation, institutions convert or reorganize the confirmations, which are in IUG format as necessary to put them in ISITC format and transmit the information as trade advice to custodians. This system, however, does not provide for direct broker to broker confirmation, in which a secure communication is maintained between the brokers. Furthermore, this system is not compatible with standard message formats in the SWIFT financial network.
The present invention is therefore directed to the problem of developing a system and method for direct broker to broker trading that will automatically match an investor's security order with an executing broker's match confirmation, but will be compatible with existing financial network standards.